Gold Mar­ket Radar (Feb­ru­ary 13, 2012)

For the week, spot gold closed at $1,722.00 down $4.25 per ounce, or 0.25 per­cent.  Gold stocks, as mea­sured by the NYSE Arca Gold Min­ers Index, fell 3.29 per­cent. The U.S. Trade-Weighted Dol­lar Index was essen­tially flat with a gain of just 0.2 per­cent for the week.

Strengths

• Har­mony Gold was one of the few com­pa­nies to report strong oper­a­tional quar­terly results this week.  Gold pro­duc­tion increased 5 per­cent to 345 thou­sand ounces in the quar­ter due to pro­cess­ing higher grades with reduced dilu­tion, thus low­er­ing the costs of pro­duc­tion too.
• At the end of Jan­u­ary, Har­mony came to an agree­ment to sell its Evan­der mine in South Africa for $217 mil­lion in cash.  This trans­ac­tion low­ers Harmony’s South African expo­sure and puts a hefty cash injec­tion into the company.
• The tim­ing for both the oper­a­tional improve­ments and the sale of Evan­der could not come a bet­ter time as Har­mony owns 50 per­cent of the mas­sive Wafi-Golpu gold-copper por­phyry deposit in Papua New Guinea.  The lat­est drill results pulled a core length of 961 meters con­tain­ing 1.37 per­cent cop­per and 1.39 grams per ton of gold.  While still early on, the aver­age cop­per and gold grade for the deposit is higher than the com­pany maker mines of Gras­berg for Freeport McMoRan Cop­per and Gold and Oyu Tol­goi for Ivan­hoe Mines.

Weak­nesses

• Nev­sun Resources had a ter­ri­ble week, see­ing its share price drop 38 per­cent.  For­tu­nately, we had very lim­ited expo­sure to this company.
• What sent Nevsun’s share price tum­bling was a near 50 per­cent cut in expected gold pro­duc­tion in 2012 as its reserve cal­cu­la­tion on con­tained gold con­tent was sig­nif­i­cantly off the mark.
• Over­all, price momen­tum in the gold sec­tor faded this week and there were still a few new financ­ings announced which tend to cap share prices in the short term.

Oppor­tu­ni­ties

• HSBC pub­lished a recent report on the invest­ment case for gold titled “Gold Out­look, Sharp­en­ing the bull’s horn” which argues for an aver­age gold price of $1,850 per ounce in 2012 with a price range of $1,450 to $2,050.
• While recent eco­nomic data has been pos­i­tive, HSBC notes a sur­vey by the World Eco­nomic Forum that shows global risks in 2012 are expected to increase. This, cou­pled with a gen­eral loss of investor con­fi­dence and erod­ing trust in the finan­cial sys­tem and gov­ern­ment poli­cies have his­tor­i­cally been sup­port­ive of higher gold prices.
• In a recent issue of Mar­ket Mus­ings & Data Deci­pher­ing, David Rosen­berg high­lighted Japan’s recent announce­ment that it has been qui­etly inter­ven­ing to weaken the yen. The U.S. and Euro­peans also have been inter­ven­ing in the mar­kets to achieve a more com­pet­i­tive cur­rency rel­a­tive to their peers.  David notes that get­ting the ratio of the gold price to global cur­rency in cir­cu­la­tion makes $3,000 gold quite attainable.

Threats

• Mark Cuti­fani, CEO of Angl­o­Gold Ashanti; Gra­ham Briggs, CEO of Har­mony; and Steven Letwin, CEO of IAMGOLD were recently inter­viewed by Mineweb at the Ind­aba Min­ing Con­fer­ence in South Africa.  Mr. Cuti­fani noted that at a gold price of $1,650 per ounce min­ers are only just return­ing the weighted aver­age cost of cap­i­tal for the industry.
• Mr. Briggs con­firmed Mark’s view on costs.  Mr. Letwin pointed out that many of the large low grade deposits con­sid­ered for devel­op­ment would be very dif­fi­cult to pro­duce gold at less than $1,200 per ounce.
• Mark Bris­tow, CEO of Rand­gold, chimed in too that in much of the indus­try, the mined grade, the actual pro­cess­ing grade, is run­ning higher than the reserve grade at the mines.  While com­pa­nies are adding addi­tional resources to the resource base because higher gold prices are being used to cal­cu­late lower cut off points for eco­nom­ics, those addi­tional ounces are very mar­ginal and higher prices will be needed if the world wants more gold.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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